Hedge fund managers are increasingly nervous about getting a knock on the door from U.S. securities regulators now that a new rule requires them to register as investment advisers and provide lots of data about their inner workings as a result.
Hundreds of large managers, which already employ sizable legal teams, took the mechanics of meeting the March 30 deadline in stride, industry consultants say.
The cost of paying lawyers and adding compliance workers to ready for the new requirement, which was part of the Dodd-Frank financial reform act, generally proved most burdensome for funds with less than $500 million in assets. And all types of funds --large and small -- had to commit hundreds of hours going through the process of checking boxes and writing narratives.
Now a far bigger concern for the industry is what the U.S. Securities and Exchange Commission will do with some of the information they are required to provide. Some fear a possible "witch hunt" from regulators eager to make an example of a fund that has been sloppy in enforcing the new rules, industry analysts say.
"What worries big hedge fund managers the most right now are the chances of having an SEC examiner show up at their doors," said Gary Watkins, a founding partner at consulting firm ACA Compliance Group. "And the chances are that there will be visits sooner rather than later."
The new rule, among other things, requires funds to provide information about any affiliates, potential conflicts of interest and details about their investors.
The push to require hedge fund managers with $100 million or more in assets under management to register with the SEC has been a long time coming. An earlier registration rule was struck down by the courts in 2005. But the idea made a comeback in the aftermath of the financial crisis and the collapse of giant Ponzi schemes like the one orchestrated by Bernard Madoff.
Now, for the first time, powerful hedge fund managers like Tiger Global Management's Chase Coleman, Tudor Investment Corporations' Paul Tudor Jones and Moore Capital Management's Louis Bacon will have to share information with the SEC and some of that with the general public as well. The fund firms did not immediately respond to requests for comment on the matter.
Thanks to the registration process, anyone with access to a computer can now look up some of the basic information hedge funds must now provide to regulators on the SEC's Investment Adviser Public Disclosure website.
"Registration does not mean hedge funds can now sit back and relax, as they are effectively on the line now," said Jonathan Saxton, who advises hedge funds on compliance at Kinetic Partners. "Now, the SEC could pay a visit, and firms are definitely nervous about that."
To be sure, for some big and well-known hedge fund managers the arrival of the registration deadline is no big deal. Managers like John Paulson of Paulson & Co, David Einhorn of Greenlight Capital and Bill Ackman of Pershing Square Capital Management have been registered with the SEC for quite a while.
John Nester, an SEC spokesman, says concerns about regulators using registration to embark on a campaign against hedge funds is overblown.
"I'm not aware of anything that would provide a basis for such a view," he said.
So far this year, the SEC has received registration information from about 1,300 hedge fund advisers. To handle the new volume of work, the regulatory agency has hired 10 additional examiners to review investment advisers and companies in fiscal 2012 and has the ability to hire more in fiscal 2013.
Examiners are likely to look most closely at which prime brokers, accountants, and auditors hedge funds use; how much money they have under management and whether that number fluctuates dramatically; and what types of investment strategies managers are pursuing, lawyers and consultants said.
"The exams that will be done now are all risk-based," said Marc Elovitz who works with hedge funds as a partner at law firm Schulte Roth & Zabel. "Previously when the SEC came to review a fund, they knew nothing about you and it was very much a fact finding investigation. Now they are doing a lot more to get information on the front end."
In addition to the data the funds have to submit this week, many will be required to submit a so-called Form PF starting in a few months. That data is meant to be used by the Financial Stability Oversight Council only and is meant to remain confidential. However, some people worry it might fall into the wrong hands.
"There is also significant concern about the protection of the proprietary information collected through this process, though the SEC has made clear it is taking all the necessary steps to keep our members' data secure," said Richard Baker, President of the industry lobby group Managed Funds Association.
Despite many of the worries, a number of newcomers to the industry took the process in stride as part of an evolving industry where investors like pension funds simply demand more transparency.
Mick McGuire got busy registering his San Francisco-based Marcato Capital Management more than a year before the impending SEC rules prompted everyone else to get busy too.
McGuire had plenty of experience with registration having previously worked at Ackman's Pershing Square Capital Management, which also registered as a young fund long before it became a darling in the pension fund world and grew to manage roughly $10 billion.
"As a newer fund we had the advantage of being able to establish these procedures at the very beginning and to capture all the information we need to meet the requirements," said McGuire. "But for a multi-strategy fund that has been around for years and has eight offices around the world, I can see how the process might have been more cumbersome," he added.
(Reporting By Svea Herbst-Bayliss and Katya Wachtel; edited by Matthew Goldstein, Bernard Orr)